Minimum pricing for alcohol
John Key is quoted in the Herald as not understanding minimum unit pricing
Mr Key believed that if a minimum price were set, it would change the quality of alcohol that people drank, but not the amount.
“What typically happens is people move down the quality curve and still get access to alcohol.”
The point of minimum unit pricing, as opposed to increased excise rates, is precisely to stop this. The idea is that there is a minimum retail price for a quantity of alcohol: the proposal here was $1.50 per standard drink, in the law recently passed in Scotland it is 50p, and in the Canadian province of Saskatchewan it is $2.25. If the price of your currently-preferred adult beverage is raised by the law, everything ‘down the quality curve’ will also have its price raised to exactly the same level.
There are reasons why it might not work: the price elasticity of demand might be low or there might be too much black-market supply. Reasonable people could also believe the benefits aren’t worth the impact on moderate drinkers: eg, at $1.50 per 12g of alcohol most red wines (at 14% alcohol) would have to cost at least $13.50 per bottle. But, if anything, it would move people up the quality curve, not down. That’s why it’s different from just raising excise rates.
You can read an analysis of the impact of the Saskatchewan policy, presented to the Scottish Parliament by a Canadian researcher: it seems to have reduced the quantity of alcohol drunk and also led people to drink lower-alcohol beverages.
Thomas Lumley (@tslumley) is Professor of Biostatistics at the University of Auckland. His research interests include semiparametric models, survey sampling, statistical computing, foundations of statistics, and whatever methodological problems his medical collaborators come up with. He also blogs at Biased and Inefficient See all posts by Thomas Lumley »
The elasticity of demand among heavy drinkers is much lower than the elasticity of demand among moderate drinkers. Wagenaar’s meta-study had heavy drinkers around 60% as price responsive as moderate drinkers. A new Australian study has the difference worse than that.
http://onlinelibrary.wiley.com/doi/10.1111/j.1465-3362.2012.00482.x/abstract
From the abstract:
“A 1% increase in the price of alcohol was associated with a statistically significant increase of 6.41 days per year on
which no alcohol is consumed (P 0.049), and a statistically significant decrease of 7.30 days on which 1–4 standard drinks
are consumed (P 0.021). There was no statistically significant change for high or moderate-intensity drinking. Conclusions.
For Australia, and countries with a similar pattern of predominant high-intensity drinking, taxation policies that
increase the price of alcohol and are very efficient at decreasing harms associated with reduced average consumption may be
relatively inefficient at decreasing alcohol harms associated with high-intensity drinking.”
If the J-curve exists, we’re doing health harm to moderate drinkers who forego consumption and having negligible effects on heavy drinking when we ramp up prices. If the J-Curve doesn’t exist, we’re imposing consumption harms on moderate drinkers while still having negligible effects on heavy drinkers.
12 years ago
Minimum pricing is slightly different, because it has a very large impact on low-price alcohol and no impact on high-price alcohol. To the extent that heavy drinkers go for the cheap stuff this could offset the differences in elasticity of demand.
The Saskatchewan research did claim a decrease in binge drinking.
12 years ago
A minimum price was something I was initially in favour off, even when I was making alcohol commercially. It depends on what you’re wanting it to achieve though.
Whilst heavy drinkers might be more responsive to price it doesn’t follow that an increase in price will decrease the consumption of heavy drinkers. Those with sufficient funds would, I imagine grumble and continue buying whatever they bought before. And it could very well hurt low income families if the heavy drinkers decide to forgo paying the electric bill.
It’s one of those mechanisms that on the face of it look simple and ideal, but requires a lot of study methinks.
12 years ago
If you have a choice of $1 wine and $20 wine then many people will buy the $1 wine.
If you add a $19 minimum price then the two wines will go up to $20 and $39. Many people will switch from the expensive wine to the cheaper one i.e. they will go down the quality curve.
If you add a $100 minimum price then the wines will go up to $101 and $120. Many people will switch from the cheaper wine to the more expensive one because it doesn’t seem that much more expensive. So they will go up the quality curve.
Well that’s if you are Chris Triggs who can taste wine quality. Me, I can barely tell red from white. I’ll stick with the cheapest. So I’ll go nowhere on the quality curve.
12 years ago
Tony,
That’s not how it works.
If you add a $19 minimum price the two wines will go to $19 and $20. The minimum price is a minimum price, it’s not an additional tax.
So, you hardly need any extra satisfaction from the better wine to pay the extra dollar. Non-linear utilities don’t come into it.
12 years ago
My logic was that if both wines had the same amount of alcohol in them whatever you did to the price of one would do the same to the price of the other.
So if the govt imposes a minimum price by imposing a $19 tax on that amount of alcohol it would push the price of both bottles up by the same $19.
If they impose a minimum price by requiring retailers to post a minimum price then the retailers will pocket the extra $19 on the first wine. That seems like a market distortion that won’t go down well in NZ.
12 years ago
The idea here is to set a minimum price, not an extra tax. If one retailer simply tried adding the minimum price to current prices, they’d be undercut by the retailer who didn’t.
I’d guess there would be price increases for drinks currently close to the minimum price to distinguish them from the stigma of the cheapest (and appeal to those using Homer Simpson’s buying strategy of always buying the second-cheapest wine on the menu) so people currently buying at this price might end up with worse than they currently have.
But I’d also expect a category of drinks that exist solely to be cheap to disappear (like those nasty, weak spirits that have alcohol content of 23.5%). As Thomas suggests, this would push people to better quality drinks, if anything.
12 years ago